There are few opening lines more famous in literature than those of Leo Tolstoy’s Anna Karenina: “All happy families are alike; every unhappy family is unhappy in its own way.”

The novel, published in a series of instalments in the mid-1870s, charts the affair of its eponymous heroine, as she finds herself drawn to the young Count Vronsky, only to come to a tragic end.

The renaissance in popularity, helped by a recent screen adaptation starring Keira Knightley, has coincided with a renewed focus on another unhappy combination – that of BP and Russia’s Alfa Access Renova in joint venture TNK-BP. The UK energy group is expected to divorce itself from the venture, selling its 50% stake, following years of disagreement with its partners, a group of oligarchs that controls AAR.

The ongoing travails of TNK-BP have the potential to cast a pall over a wider reformation of mergers and acquisitions in Russia, however, as the country’s companies grow more sophisticated, domestic consolidation continues apace, and both state-affiliated and private enterprises increasingly look outside their own borders.

Todd Berman, head of investment banking for Troika Dialog, acquired by Sberbank in a deal that completed early this year, said: “I think we’re in the early parts of the third stage of Russian corporate development. The first wave was back in the 90s during the privatisation programme, where the nation’s resources were divided up between a group of well-connected individuals; and then the second stage, which followed on from that, were the battles for ownership and control. The next wave, which I believe is starting now, is the normalisation of corporate ownership and corporate governance.”

The long-running relationship between BP and AAR appears to be nearing its final death throes. For M&A bankers based in the country, the hope is the damage to Russia’s reputation won’t outlast the almost 10-year-long marriage.

Dirk Werner, head of M&A execution at Troika Dialog, said that, while Russia’s accession to the World Trade Organisation, announced in August, strong gross domestic product growth and a well-educated workforce continued to attract would-be international investors, concerns over how a number of joint ventures had worked out were acting as a barrier to more activity. “I think that does have a cautionary impact on some of the players, especially if you are an equal player with a Russian business that is well established, as it can be tricky if you ever fall out. I think that concern is holding people back, despite the strong fundamentals.”

BP itself has said it may use the proceeds from the stake sale to buy a larger share in Rosneft, testament to the UK company’s continued interest in the country. Deals in the oil and gas sector will continue to be politically charged, however, emphasising the need for an appropriate structure for any joint venture and experienced managers able to soothe potential tension in the relationship.

Daniel Jacobowitz, co-head of investment banking coverage and advisory for Deutsche Bank Russia, said: “I think the challenge for western companies doing business in Russia will be how to structure joint ventures which are sustainable and provide enough incentive to the private entrepreneur, which represents the Russian party, or the state entity, to deliver benefits. There has always been tension between both parties in the business model itself, and that remains a key challenge in attracting foreign direct investment.”

Outside the oil and gas sector, companies in the retail and consumer sectors continue to express significant interest in Russia, according to bankers. AP Moller Maersk’s $862.5m deal for a 37.5% stake in Russian container and oil products terminal operator Global Ports Investments, announced in early September, is cited as an example of investment in the transportation sector, while one banker suggested certain infrastructure assets might attract the eye of Asian and Middle Eastern sovereign wealth funds.

Russia has also drawn up a lengthy list of companies to be privatised, which includes the likes of banking group VTB, technology fund Rusnano and shipping group Sovcomflot. Many had expected the Russian state to downsize its stakes via the capital markets, but were given hope last week when Igor Shuvalov, deputy prime minister, was quoted in the local press as saying the Russian government would consider selling the 25% minus one share block of Sovcomflot to a Singaporean company.

Looking abroad

Russian companies have in the past focused much of their attention inwards, with domestic M&A typically making up 70% of total activity. There is, however, an emerging theme of chief executives looking out, rather than in, according to bankers, with outbound M&A activity making up close to 20% of all Russian activity for the year to date, the highest proportion for the period since 2008.

Berman at Troika Dialog said: “We have a number of sophisticated clients, which are leaders in their sectors, that want to move beyond Russia and are starting to think regionally and globally. There is a mismatch at present between Russia’s political clout and economic power and its international corporate ‘footprint’. In time, you’ll see a number of the leading Russian corporates move beyond their current boundaries.”

There are four key and often overlapping dynamics behind the increased interest in outbound M&A, according to bankers – a need for technology, a need for diversification, an excess of capital and the increased availability of affordable assets in western Europe.

Nikolai Tchernov, head of Russian M&A at JP Morgan, said: “In the past, we have seen inbound investments by global companies, where they were buying businesses or forming JVs, bringing in know-how and management skills. Going forward, there could be more deals in the opposite direction, as Russian companies look to acquire new skills and competencies, and implement them in the Russian market.”

Bankers cite Russian Railways’ $1bn deal for a 70% stake in Peugeot’s logistics arm Gefco as evidence of this dynamic in action, as Russian companies look to acquire expertise and roll that out across Russia.
Sergei Arsenyev, a managing director in the investment banking division at Goldman Sachs in Russia, said: “A lot of Russian companies, both large and small, have capital and need skills and know-how, and so a lot of the formal engagements we have are about identifying technology providers across a wide variety of sectors that will be complementary to Russian companies. There is a whole base of smaller companies which are looking to grow inside the Russian market through the acquisition of internationally accepted know-how.”

For the likes of Sberbank, VTB and Gazprombank in banking, and Vimpelcom, Megafon, MTS and Rostelecom in telecoms, meanwhile, outbound M&A provides the opportunity to diversify away from what are already highly consolidated domestic markets, according to bankers.

This need for technology and diversification coincides with a period where, thanks in part to high energy prices and continued economic growth, there is excess cash in the hands of state-affiliated entities, private enterprises and oligarchs alike. Bankers cite the likes of Mikhail Fridman, Alisher Usmanov, Mikhail Prokhorov, Oleg Deripaska and Roustam Tariko as individuals whose firepower outweighs that of many European corporates.

Jacobowitz at Deutsche Bank Russia said: “As a client base, Russian high net worth individuals’ financial groups and state-controlled enterprises are emerging as an equally large and sustainable source for acquisitions as European corporates, which are facing significant deleveraging pressures. The balance of power has shifted from western to eastern Europe in terms of liquidity and capital. In my view, Russia in particular is a source of excess of capital which can be re-invested in Europe.”

Domestic consolidation

While there is increased interest in inbound and outbound activity, it is domestic activity that will continue to be the mainstay of Russian M&A, according to bankers.

Atanas Bostandjiev, chief executive of UK and international at VTB Capital, said: “There is a willingness, almost a demand, to expand internationally, but the majority of the activity will continue to be made up of domestic deals, as there are a number of sectors in Russia, such as the financial sector and retail, which are ripe for consolidation.”

While a number of deals have taken place over the past two years, the August announcement by Otkritie Financial Corporation that it intended to consolidate up to 100% of Nomos Bank in a deal valued at $2.4bn was considered especially encouraging, given that it hinted at substantial private-sector involvement in the consolidation process, as much of that which had gone before had been driven by state-backed rivals.

Arsenyev said: “If you take the combined aims of the Russian government, one is to make the Russian banking system stronger, and one is to privatise. There are a number of state-owned banks on the government privatisation list, and these two aims have to connect somewhere.”

In the retail and consumer sector, meanwhile, leading players X5 Retail and Magnit are expected to lead the charge in taking market share, both via organic and inorganic growth. Arsenyev added: “The modern format retail penetration in the market is still relatively low, the purchasing power of the Russian population has been increasing, and the share of organised retail is still fairly small. That to me is a natural playground for consolidation activity.”